Exclusive: 10 reasons why the markets are trading cautiously today

Indian markets remained cautious on Friday with no specific trend emerging ahead of the Union Budget on February 28 and government's road-map to bridge current account deficit and fiscal deficit that will help decide the pace of growth recovery in Asia's third-biggest economy. Weak global cues also dented sentiment

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Global markets tumbled on Thursday after minutes of the rate-setting US Federal Reserve’s committee meeting showed some American central bank officials had raised concerns over its loose monetary policy.

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India’s benchmark indices posted their biggest intra-day fall since May 2012 on Thursday, while local gold prices firmed a little on worries a Fed move to reduce stimulus would cause a decline in fund inflows from foreign institutional investor (FIIs) into risky assets like emerging markets. A decline in FII money coming into the Indian markets over the past three days also heightened caution.

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US stocks fell for a second straight day on Thursday and the S&P 500 posted its worst two-day loss since November after reports cast doubt over the health of the US and euro-zone economies. But a late-day rally helped stocks erase some of their losses with most of the pullback concentrated in the technology- heavy Nasdaq.

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The initial risk-off wave seemed to stem from widespread speculation that a commodity fund was unwinding large positions en masse but the slew of weaker than expected European PMIs certainly added to the risk-averse mood as the market was reminded that the macro backdrop in the Eurozone remains weak.

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Sentiment towards Europe was also hurt by uncertainty ahead of Italy's election over the weekend. Most investors expect a centre-left government to win and continue with reforms to tackle Italy's debt problems. But a resurgence of former leader Silvio Berlusconi has raised new worries.

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In key economic data, the manufacturing surveys in February were softer than expected and the services surveys were no better with the German headline dropping 1.6pts and the French number falling deeper into contractionary territory at a four year low of 42.7. Dutch data were also weak with consumer confidence falling from -35 to a record low of -44 in February.

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The VIX index, a risk indicator, shot up nearly 10 per cent on Thursday, the most this year, following an unexpected sharp fall in the market on concerns that the US central bank would curb its bond-buying programme. Implied volatility (IV) soared as traders flocked towards options ahead of the Union budget to hedge their positions in the cash market.

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The minutes of the last Fed meeting have raised concerns that, the Fed may withdraw the monetary stimulus if there is some improvement in the economic data. This has raised concerns about fund flows across asset classes, including emerging markets. Indian markets have received substantial FII money over the past few months and any reversal of the same may make markets vulnerable, if matching flows do not come from the domestic participants, cautions Dipen Shah, Head of PCG (Private Client Group) Research, Kotak Securities.

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The markets may react adversely to weak interim data points, given that there is still largely a lack of belief in the Government’s efforts, including fiscal consolidation, and hopes even for a pre-election stimulus to consumption. We would view such corrections as a buying opportunity and remain positive given our expectations of continued Government efforts to revive the economy, along with fiscal consolidation – a medium-term positive, said Gautam Chhaochharia, executive director – India strategy & midcaps, UBS Securities India